Egyptian land deals: plus ça change

ExclusiveMarch 2014, by Nizar Manek

As Egypt’s popular uprising broke out three years ago, the crony capitalism of Hosni Mubarak’s regime came into the crosshairs. One grievance was against the willingness of the regime to directly allocate land at undervalued prices — sometimes at a dollar a square-metre, or less — to the real estate companies of its inner circle of politically-connected businessmen and the investment funds associated with them.

“It was a real problem that a small number of businessmen were able to buy large bundles of land at a time with no scrutiny over bids and tenders,” says Shehata Mohamed Shehata of the Egyptian Centre for Integrity and Transparency, a Cairo-based lawyer who has brought several post-Mubarak cases of alleged corruption to Egypt’s courts.

One case Shehata brought to the Cairo Administrative Court in April 2011 was against Mubarak’s prime minister, tourism minister and the chairman of the board of directors of the Tourism Development Authority over a 1993 land allocation to the Egyptian Resorts Company (ERC), a real estate developer. According to his original court filing, the case alleged that ERC was awarded a direct contract for a 33m square-metre plot of prime state land in the Hurghada region along the Red Sea coast (or around 90% of the region and about 20 kilometres away from Hurghada International Airport) for US$1 per metre.

When Kamel signed the contract for the land, called Sahl Hashish, an earlier condition that it could not be sold until after infrastructure projects were completed was removed from the contract, according Shehata’s court filing. The land was awarded to ERC and was later split up and set aside by Kamel, says the filing, which accuses him of re-selling the land at inflated prices. The filing says this resulted in little or no development taking place in Hurghada; the land ultimately flipped from one buyer to another for a “quick profit”. According to the state-owned Middle East News Agency (MENA), ERC re-sold parcels of the $1 per metre land at prices between $60 and $300 per metre (1).

When Shehata first filed the case, there appeared to be tangible results. The Tourism Development Authority revoked the land allocation from ERC, according to MENA. ERC removed its then chairman and board member Ibrahim Kamel — a senior member of Mubarak’s National Democratic Party (NDP) — from its board without citing a reason (2). Meanwhile, Kamel was arrested on charges of inciting thugs to attack protestors in Meidan Tahrir during the heyday of the 25 January 2011 revolution.

ERC appealed the decision. The publicly listed company now expects the case to be resolved by the end of this month, or the end of the first quarter of the financial calendar when it will report earnings and dividends payments (3). Investment analysts will be watching. For one, a September analysts’ note from Naeem Holdings said ERC continued to suffer from “poor financial performance” as it failed to make any significant land sales. “Land sale has been the principal revenue generating activity for the company in the past” (4).

While a small number of entrepreneurs managed to control a rising and substantial share of the Egyptian formal private, the significantly larger net profits of politically-connected firms relative to others seemed to disappear after the fall of Mubarak on 11 February 2011, says Ishac Diwan, who teaches at Harvard’s Kennedy School of Government and is preparing extensive empirical research on the subject (alongside his colleague Marc Schiffbauer).

ERC and other real estate developers in Egypt, such as Talaat Moustafa Group Holding and Six of October Development and Investment, are in one way or another, facing “bureaucratic hurdles” to achieve clear land titles, which has been the major concern amongst property buyers and investors, says Harshjit Oza, assistant director of research at Naeem Holdings. Resolving land disputes is, he says, essential to Egypt attracting foreign capital into the country.

While ERC said in December that the Administrative Court postponed the court proceedings to today (5), Egypt has since then undergone a change in its interim government. A former housing minister under Mubarak, Egypt’s new interim prime minister Ibrahim Mahlab said at a recent real estate forum that a committee would be formed to look into solving disputes between the housing ministry and investors, but that it would not look into legal disputes pending in courts.

The resemblance of pre- to post-Mubarak Egypt has already sent tremors through Egypt’s court system. The Giza Criminal Court this month granted bail to steel magnate Ahmed Ezz for a charge of illegal acquisition of a majority stake in a state-run iron and steel company (6). According to MENA, graft and money laundering charges are still pending against the former senior member of the NDP — sentenced last March to 37 years in prison.

Most of Shehata’s cases are still pending in the courts. Some have ossified, others have fallen by the wayside. But Shehata, who lives in the countryside on the outskirts of Cairo, prizes the case over the plot of land: the revolutionary idealism it symbolised inspired him to leave a general legal practice and put all his eggs in the typically low-reward anti-corruption basket. Shehata says he hasn’t heard anything from the judge on the ERC case and repeats his original complaint: that the allocation of the plot of land contravened laws relating to bids and tenders.

The “state of confusion regarding real estate investments has ended despite all the obstacles and concerns surrounding the current policies, which look to strike a balance between investors’ rights and those of the state,” said Mahlab at the real estate forum, according to MENA (7). He added that land would no longer be allocated through direct contracts (as Shehata claims the Sahl Hashish land was allocated) but through public auctions. (Mahlab is also a former chairman and chief executive of the state-owned construction company, Arab Contractors. Two Arab Contractors engineers are accused alongside Mubarak and his sons of embezzling $17.9m allocated for the renovation of presidential palaces but allegedly spent on Mubarak family private villas from 2002 until 2011 (8).)

Kamel’s son, Mohamed Ibrahim Kamel, 35, is presently chief executive officer, managing director and board member of ERC. Prior to joining ERC, the younger Kamel worked for eight years with KATO Investment, an Egyptian industrial and services conglomerate his father used to chair. A filing with the Egyptian Stock Exchange at the time showed KATO had an 11.6% stake in ERC. (In a March 2011 letter to the Exchange, ERC’s then head of investor relations, Abu Bakr Makhlouf, said there was “no truth to the rumours” that Kamel was the person who acquired the Sahl Hashish land (9).)

Blessing from heaven

The perceived disintegration of the structures of crony capitalism partially explained the turmoil of the Egyptian Stock Exchange during the period of the revolution. (Kamel appears in Diwan and Schiffbauer’s list of 30 politically connected businessmen; and the Harvard research also lists 25 politically connected real estate firms.)

After 2004, there had been a “takeover” of the formal economy by the new business insiders, says Diwan, a former World Bank country director for Ethiopia and Sudan. Corruption oiled the wheels. The Harvard research identifies 104 publicly listed firms for which politically connected businessmen served as chief executives, board members or major shareholders (above 10% shareholding). Several of the 104 are holding companies or investment funds masking large business conglomerates, according to the research, and the 10 most intertwined politically-connected business tycoons together control stakes in 322 firms.

Though he has heard little from the judge handling the case, Shehata doesn’t express optimism or pessimism; efficient, overworked and yet stoic, he returns from downtown Cairo each evening and takes long strolls to breathe the fresh countryside air. He prefers to keep his idealism.

The Harvard research puts the process down to historical forces: state-led development under Gamal Abdel Nasser, timid opening to the private sector by Anwar Sadat (which led to the constitution of a business elite through the marriage of a state bourgeoisie and old money), and then the slow-burning economic (but not political) liberalisation under Mubarak.

As for Kamel the younger, he said in September that the company’s position in the land sale is “legal,” and that ERC plans to invest nearly $200m to build a touristic project in the Sahl Hashish region (10). An absence of major land sales has left ERC’s stock volatile, observed a November analysts’ note from EFG Hermes, an investment bank (11). As Egypt backflips to the future, a resolution to the dispute will give him some relief and buoy up analysis of the stock. As another investment firm put it five years ago: the Sahl Hashish land, given to ERC “at pennies per sq m”, was a blessing from heaven (12).